If you want to hold safer stock investments for your portfolio, then diversifying and using our three-part approach will help. That could also help to reduce the impact of inflation.

In economic terms, inflation is the steady increase in prices for goods and services that accompanies an expanding currency supply.

For investors interested in safer stock investments to help reduce the impact of inflation, here are some tips:

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The global trend of inflation

Most nations are now on a “fiat money” standard. This lets them create as much money as they wish, since the money has no backing. It is simply a printed piece of paper or an entry on a computer. (The only exceptions are those countries that back their currency with holdings of another, more widely accepted currency, usually the U.S. dollar—which itself is a fiat currency.)

So far, the central banks in most advanced countries seem to have kept things more-or-less under control. Inflation is staying low, even though these countries continue to print/create large quantities of domestic currency.

As long as we continue under a fiat money system, the money supply will keep on growing. This growth will continually whittle away at the scarcity value of money. The rate of price change will vary, and we may see short periods of deflation. But the overriding trend will be inflationary.

We are now in a situation when many inflation-suppressing factors are at work. Eventually, all these inflation-suppressing factors will end. Some will turn neutral. Others will turn into inflation stimulants. Several of them could reverse all at once. Instead of pushing inflation down, they would then work together to push inflation up. That combination could be enough to set off a more serious bout of inflation than anybody expects.

There’s a large unpredictable element in any outbreak of inflation. A great deal depends on consumer confidence, crowd behaviour and random events. So investors need to be prepared.

Resource stocks are among our recommendations for safer stock investments to beat inflation

The resource sector is subject to wide and unpredictable swings in the prices it gets for its products. In the rising phase of the business cycle, when business is booming, resource demand expands faster than resource supply, so resource prices shoot up. This balloons profits at resource companies. When the economy slumps, resource prices fall, and this drags down resource profits and stock prices.

In addition to rising and falling with the business cycle, however, resource stocks have a history of rising along with long-term inflationary trends. This gives them a rare ability: they provide a hedge against inflation.

A diversified portfolio can help you hold safer stock investments

Your best defence against inflation in our opinion is to stick with our Successful Investor portfolio approach. It has three key rules: Invest mainly in well-established stocks with a history of revenues, earnings and dividends; spread your money out among most if not all of the five main economic sectors (Manufacturing & Industry, Resources & Commodities, Consumer, Finance, and Utilities); and downplay or avoid stocks in the broker/media limelight.

Our Successful Investor approach has a big advantage: It’s likely to pay off in the long run, whether we have deflation, inflation, or something in between.

Here’s how to put safer stock investments into your portfolio to cut risk

Think like a portfolio manager: As part of their stock market research, portfolio managers gather information from companies, industry studies and other sources. A good portfolio manager then tries to build a client a portfolio that makes money if things go well, but won’t lose too much if the opinions turn out to be faulty, as often happens.

Diversify geographically: One of the worst things you can do is invest so that your portfolio would suffer a great deal due to a localized downturn in any one city, state or province. Ideally, your portfolio should give you exposure to much of the North American economy, plus substantial international exposure, if only through North American multinationals.

Hold a reasonable portion of your portfolio in U.S. stocks: We continue to recommend that Canadian investors diversify part of their portfolio (up to 25%, say) in well-established U.S. stocks. That’s because the U.S. market features major multinational opportunities that simply aren’t available anywhere else. As well, many U.S. firms are unique world leaders.

Give your investments time to pay off: Resist the ever-present urge to buy and sell. A sound portfolio, built through careful research, needs surprisingly few changes over the years. Trading less frequently is a good thing, because it gives you fewer occasions to make costly mistakes.

Develop a clear idea of how much risk you are willing to accept, through good times and bad: For example, some investors become more aggressive as the market rises, and more conservative as the market falls. The problem here is that all market trends, up or down, eventually reach a turning point. If you take on more risk as the market rises, you’ll wind up owning your riskiest portfolio just when the market is near a peak. That’s when risky stocks can do their greatest harm to your net worth.

What sector have your safest investments come from historically?

Do you prefer to keep your portfolio filled with safer investments or do you like to take on a small number of risky stocks?